Derrick Iverson is a divisional manager for Holston Company. His annual pay rais

Question

Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division's return on investment (ROI), which has been above 20% each of the last three years. Derrick is considering a capital budgeting project that would require a $4,160,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is 19%. The project would provide net operating income each year for five years as follows: $3,700,000 1,600,000 Variable expenses 2,100,000 Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation $710,000 710,000 Total fixed expenses ,420,000 Net operating income $680,000 Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Explanation / Answer

1)

b) Simple rate of return = (4250112/4160000) *100/5 = 20.43%

c) Yes

D) No

Year 1 Year 2 Year 3 Year 4 Year 5 Net Operating Income 680000 680000 680000 680000 680000 Add : Depreciation 710000 710000 710000 710000 710000 TOTAL 1390000 1390000 1390000 1390000 1390000 Disc Rate @19% 0.840336 0.706165 0.593416 0.498669 0.419049 Present value 1168067 981569.1 824848 693149.6 582478.6 Initial Investment 4160000 TOTAL Present value 4250112 NPV 90112.5

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.